Money Doesn’t Grow on Trees

Posted on February 13, 2007 by Russ

You know that. I know that. Does our leadership here in the Bronze Golden State know that?

Last week I got the chance to read. I was forced to—I was in bed with the flu. A very small blurb in the Register caught my eye: “State $1 Billion Behind in Collections in January.” California, for unknown reasons, collected $1 billion less in tax revenues than projected in January. Bureaucrats said not to worry; we think it’s a glitch and we’ll catch up soon.

I have my doubts.

Back in January I wrote about two stories. The first story is based on a Dan Walters column in the Sacramento Bee and examines the possibility that a single taxpayer led to a large increase in tax revenue collections in 2006. The second story examines the likely impact of the recent freeze.

I don’t think it takes a brain surgeon to see where we’re going. The talk out of Sacramento is all about new spending programs, new health insurance programs, etc. What they really should be talking about is cutting the current programs, because there isn’t going to be money to pay for everything on the Legislature’s wish list. Come May or June, when the impact of the collections from the 2006 tax season rolls in, this may become clear. This will be very clear in the fall, when estimated payments are collected at levels that will be much lower than the state anticipates.

Of course, one option is a tax increase. However, it takes a 2/3 vote of the Legislature for that to happen, and the Republicans have enough votes to block that.

California still has a structural deficit. I’m betting it’s going to be a lot worse at the end of 2007 than it is today.

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Neteller, the DOJ, and the IRS

Posted on February 8, 2007 by Russ

One of my practice areas is professional gambling. Many gamblers maintained an account with the e-wallet firm Neteller. Neteller served as a financial intermediary between US customers and online gambling firms. In January, the Department of Justice arrested the two founders of Neteller and charged them with multiple offenses, including money laundering. Neteller then pulled out of the US market. Neteller announced today that they are cooperating with the DOJ, and that $55 million in funds had been seized by US law enforcement.

Neteller, in one swell swoop, lost over half of its business. Ignoring whether or not such business was legal, assume you were running Neteller. The Department of Justice has arrested your two founders, has decided to fight you, and you no longer have any means to make financial transactions to the United States. What would you do? Fight the US DOJ, or make the best deal you can? It’s clear from the Neteller press release that they are in negotiations with the DOJ, and that transaction records are being sent from Neteller to the DOJ.

Indeed, it’s clear what’s likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won’t indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It’s also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller.

What does the DOJ want with thousands of pieces of data? Well, Neteller required the customer’s name, address, and for many accounts, their social security number. The details of those transactions will undoubtedly be sent to a government agency that’s in the revenue collection business: the IRS.

So what does that mean for the customer who used Neteller?

If you complied with the law—you reported all of your gambling income and your foreign bank accounts—you have nothing to worry about. But probably fewer than 5% of taxpayers report their gambling transactions as income.

First, Neteller is considered to be a foreign financial institution. If you have a foreign bank account, and have $10,000 or more in a foreign bank account(s) at any one time, you are required to file Form TD F 90-22.1 by June 30th of the following year with the Department of the Treasury and check the box at the bottom of Schedule B. If you have a foreign bank account and don’t declare it, you can face civil and/or criminal penalties. Anyone who received $10,000 or more in one transaction from Neteller had a foreign bank account. I expect the Treasury Department to check their records and come after those who didn’t declare their Neteller account. A few individuals may even face criminal prosecution over this, if they had extremely large transactions from Neteller.

Second, the IRS will check their records and see if individuals receiving funds from Neteller declared gambling winnings. The IRS will almost certainly target those receiving large amounts. If an individual received large amounts from Neteller, and didn’t declare any gambling winnings, now is the time to amend your return, and pay the tax, interest, and penalties. It’s almost always better to come forward to the IRS than to have the IRS knock on your door.

The IRS’s first targets will be those with large (in dollars) transactions. But given the ability of the IRS to conduct computer matching, if you received funds from Neteller and didn’t declare any gambling winnings, you might receive a “letter audit” from the IRS. (“Dear taxpayer, we’ve added $xxx [the amount of money you received from Neteller] to your income. If you agree, pay the tax, interest, and penalties….’)

I believe that a few individuals will likely face criminal prosecution over this. If the IRS can find an online gambler who earned over $100,000 and didn’t declare his gambling income (and I think the IRS will have several to choose from, and might even find someone who earned over $1 million) that individual could find himself facing jail time for tax evasion.

But what if you used Neteller for non-gambling activities? Interestingly enough, I know of one firm that paid individuals through Neteller. If you declared the income on your tax return (and can show that), there’s nothing to worry about. You may have to spend some time responding to an IRS notice, but if you’ve paid your taxes, you’re fine.

However, I believe that many (if not most) online gamblers have thought that since Neteller was based on the Isle of Man (a known tax haven), the IRS would never be able to see their records. You’ve just lost that gamble. It will take some time, probably several months at a minimum, for the IRS to conduct their matching of records. If you’re one of those who just lost the first gamble, do you want to double-down and bet that the IRS won’t find you or do you want to amend your return(s) and pay the tax that you knew you owed…and the interest and penalties?

As I’ve said many times, gambling income is taxable. The Tax Code isn’t fair to gamblers, but the alternatives if you don’t pay your taxes are worse than paying the tax that you owe.

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Holes in the Tax Code

Posted on February 7, 2007 by Russ

With the 2008 Budget being sent to Congress, the Tax Foundation’s Tax Policy Blog shows the cost of ten famous deductions, credits and exemptions. Read the article for the full story.

Meanwhile, Roth Tax Updates has the full details of the proposed budget (as far as taxes goes). Joe Kristan correctly points out that the tax gap closures, which total about $30 billion, are what’s most likely to pass Congress, along with another year of AMT relief.

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Westinghouse and Sylvania

Posted on February 7, 2007 by Russ

Two famous electronics companies. In fact, I used to work for Westinghouse (“You can be sure if it’s Westinghouse”). But that’s not the story here. Instead, it’s the usual tax evasion, with a twist.

>From the Pittsburgh Post-Gazette comes the story of Soviet nuclear reactors, theft of over $9 million in aid money from many countries, and tax evasion.

Mark Kaushansky is a former Soviet refugee, having emigrated from the Ukraine in 1979. He landed in Monroeville, Pennsylvania and went to work for Westinghouse. In the 1990s he met up with renowned Russian atomic scientist Dr. Evginey Adamov. Dr. Adamov was arrested in Bern, Switzerland at the bequest of the US Department of Justice, but was extradited to Russia. According to Kommersant, Dr. Adamov hasn’t admitted guilt in his trial for “…grand fraud of the organized criminal group and with the office abuse that led to enormous offenses.”

Mr. Kaushansky, though, has pleaded guilty to nine counts of tax evasion. The government alleges that he’s bilked the IRS out of $5 million. Defense attorney Fred Theiman is quoted by the Post-Gazette as saying, “A lot of assumptions made by the government are perfectly rational, perfectly logical and perfectly wrong.” The IRS says that the pair used shell companies that never filed tax returns to hide money. A judge will have to decide how much Mr. Kaushansky’s companies didn’t pay. I’ll let you know more when Mr. Kaushansky is sentenced.

Meanwhile, a Sylvania, Ohio attorney was sentenced after being found guilty of evading $321,000 in taxes. Joseph Weisberg will have five months at ClubFed to think about the errors of his ways. Mr. Weisberg used his client trust account to hide his income, and that’s not a good idea at all.

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The Kanter Sage Continues

Posted on February 5, 2007 by Russ

I’ve written about the Kanter case before (here , here, and here). In that case, the Tax Court reversed the finding of the trial court judge, and didn’t release the findings of the trial court judge. The case made its way to the Supreme Court. The Supreme Court remanded the case, with an order that the trial court judge’s findings be made public. The trial court judge found that there was no tax evasion; however, the tax court ruled that there was. After an intermediate stop at the 11th Circuit Court of Appeals (which ordered the Tax Court to make a ruling by February 2nd), the Tax Court came out with its ruling.

Now, given my cynical view of the world, how do you think the Tax Court would rule the second time around? Would it come out with a ruling in line with the trial court judge or a ruling similar to its own ruling? Yes, the Tax Court ruled that there was tax evasion, and that the lawyer (Burton Kanter, now deceased) accepted kickbacks from the Pritzker family, and evaded taxes on those kickbacks. The Pritzkers own the Hyatt Hotel chain.

The New York Times reports that attorneys for the three plan on appealing the decision. Given the history of the case, expect a return trip to the Supreme Court in 2008 or so.

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Prescription: Tax Fraud

Posted on February 5, 2007 by Russ

I’ve been under the weather the last two days, fighting a bout of the flu. That’s better than these individuals, including some doctors who should (one day) have a prescription to fight off the malady.

Dr. Steven Herman was a plastic surgeon, with a practice in Norwalk, Connecticut and Manhattan. I say “was” because he’ll be spending 20 months at ClubFed. Dr. Herman started by committing tax evasion; he took $883,000 from his medical practice and didn’t report the income. Then he asked friends and household employees to buy money orders payable to him at post offices. He would have them buy (typically) four $700 money orders, so that the $3,000 requirement for reporting wouldn’t happen. That’s a second felony, structuring. Finally, he billed a health insurance company for procedures that were cosmetic, but he told the insurance company that they were medically necessary. That’s a trifecta, and it earned Dr. Herman the prison time, $800,000 in a civil settlement to the IRS, $150,000 in restitution to the insurance company, $236,000 in forfeiture because of the structuring, and a fine of $60,000. You can read the story here.

Meanwhile, phony trusts snagged three in Morgantown, West Virginia. Dr. Max Harned and his wife were found guilty last November of hiding money in trusts; they face up to 25 years in prison according to this AP Story. And a forest service employee who hid $1.1 million in trusts faces nine years in prison. I missed the first story of Dr. Harned’s indictment last June. Dr. Harned apparently told IRS agents, “I’d like a piece of you, I’d kick your butt” and “I’m a very good shot.” All three convicted in West Virginia were clients of Las Vegas attorney Robert A. Jones. Mr. Jones told the Pittsburgh Post-Gazette that he’d win both of these cases. Apparently he needs to buy a new crystal ball.

It’s a shame that these medical practitioners haven’t spent some money in finding a cure for the flu. If they had been successful, they wouldn’t have any money problems.

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Tax Myths for the Poker Player

Posted on January 31, 2007 by Russ

That’s the title of the article I’ve written for the 2+2 Online Magazine. If you’re a poker player, the magazine (which is free) is a great resource; I heartily recommend it.

My article covers many tax myths that I’ve seen in online poker forums. You can read the article here. The entire 2+2 magazine is available here.

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Minimum Wage and Taxes

Posted on January 31, 2007 by Russ

Last night the Senate passed an increase in the Federal minimum wage. Attached to the bill are tax breaks for small businesses and tax hikes for big businesses. There are several issues here, so let’s take a look at what this bill might mean.

First, the House passed an increase without any tax changes. Leaders in the House have said that they want a “clean” bill—one without any attachments. Unfortunately for the Democratic leadership, in the Senate it takes 60 votes (out of 100) to cut-off debate. Republicans made it quite clear that without the tax changes, this bill was d.o.a. in the Senate.

As to the minimum wage increase itself, it will have no impact at all in California; the state’s minimum wage is higher than the new federal minimum wage.

However, the tax provisions will have an impact if they become law. The two versions of the bill must go to a conference committee which will have to iron out differences, and then it must pass both the House and Senate again. Also, under the Constitution tax changes must be first started in the House, not the Senate (there are ways of getting around this, though). So if the House leadership is adamant about a “clean” bill, the tax changes won’t happen.

The biggest impact of the new legislation would be a cap on the amount of deferred compensation. Today’s Wall Street Journal has an editorial arguing against this provision. The Journal argues that if deferred compensation isn’t allowed, companies will switch to other forms of compensation. And they’re correct, too. As the cliche goes, where there’s a will, there’s a way. If someone wants to pay $x, he’ll find a way.

So it should be interesting to see what happens with the bill. Since an increase in the minimum wage leads to fewer jobs (this is basic economics), I personally hope that the bill dies. But given that House leadership desperately wants to pass this legislation, I expect to see it emerge in some form later this year.

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A Slam for Traylor? No, It’s the Slammer.

Posted on January 28, 2007 by Russ

Robert “Tractor” Traylor, a former NBA player for Milwaukee, Cleveland, Charlotte, and New Orleans, pleaded guilty on Friday to a charge of preparing a false tax return. Mr. Traylor, 29, attempted to conceal assets of his cousin, Quasand Lewis, according to this AP story. Mr. Lewis, Traylor’s cousin, was recently convicted of drug trafficking and money laundering–he distributed 22,000 pounds of marijuana in the Detroit metropolitan area.

Here’s a wonderful quote from the story: “Robert Traylor is a basketball player, not a businessman,” Traylor’s attorney, Steven Fishman, told The Associated Press on Thursday night. “He got some bad advice and unfortunately he took it. So here we are.”

Unfortunately for Mr. Traylor, the IRS doesn’t appreciate lying on a tax return. Mr. Traylor could be sentenced to as much as fourteen months at ClubFed.

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Will You Really Get that Hybrid Vehicle Tax Credit?

Posted on January 26, 2007 by Russ

There’s a great op-ed piece in today’s San Francisco Chronicle about the hybrid vehicle tax credit. The op-ed, written by Edward McQuarrie, a professor at Santa Clara University, gives the unpleasant details of how many Californians won’t get the full value of the credit: the AMT will eliminate the tax break for many. I’ve been warning clients about this for some time.

But if you’re single, making between $25,000 and $115,000, you will likely get the full credit. Everyone else should read the article and learn why the AMT needs to be reformed (though that is very unlikely to happen in today’s Congress).

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